Savings vs Paying Off Student Loans?

I have approximately $48k in student loans left after paying off $4k of the principle in the last year. The interest on the bulk of the loans is 8.5 with two smaller loans at around 4. I've been over-paying on the former and just paying the minimum on the latter. Is this my best plan?

I've also been stocking money away in to savings, and that's sitting at $7k. The interest rate on my savings account is atrocious, but I do want to keep some savings for when I go to grad school (so I can still pay off the interest or have emergency money or whatnot).

What's a good place or way to invest my money to get something resembling returns? Should I instead throw all or most of that money at the high-interest loan and keep a smaller savings? I have a good-paying job, so the issue is more where to put my money. I know I won't get a return to cancel out that 8.5 interest rate, but I don't want to be without savings entirely.

Savings vs Paying Off Student Loans?

First, paying off high interest debt is better making low returns on the same amount of money. Think of it this way: You owe $100 at 10% interest, and you have $100 in savings at 5% interest. After one year you will owe a total of $110, but will only have $105 in savings. You have lost $5.

However, this does not mean your best bet is to throw all of your savings at the higher-interest loan. This will leave you vulnerable to unforeseen expenses. You might be forced to take out an even higher interest rate loan to pay the unforeseen expenses.

So first, determine the minimum amount of savings you are comfortable with. Most advisors say 1 to 3 months salary is the minimum %26quot;emergency%26quot; savings you should keep. This is just a guideline, you need to determine how much savings YOU are comfortable with.

Take the rest of the savings (if any) and apply them to your highest interest rate debt. If you have high interest rate credit cards (%26gt; 8.5%), put the money there. If not, apply it to the student loan. Continue to pay the minimum on the 4% student loans (assuming this is your lowest interest rate debt).

Where to put the remaining savings? Savings accounts are notorious for the measely returns (sometime not even enough to keep up with inflation). Money market accounts usually provide greater returns (recently I saw a 5.05% rate advertised). You can still access the money in a money market account at any time (there are limits on the number of withdrawals you can make in a month, but not the amount). CDs (certificates of deposit) are another option. These also usually provide higher returns; but your money is tied up for a specified amount of time. Early withdrawal brings penalties that will wipe out any returns and then some. A stock index fund is a riskier option. There is the potential to lose money, but in the long run the returns are higher. A no-load index fund (such as Vanguard's S%26amp;P 500 fund) will pay close to the same as the market (somewhere around 8% over the long haul), with very low fees.

The primary question that will help determine where to put your savings is: What is your risk tolerance and time frame? If you can't stand the thought of losing any of your savings, you will want to take the lowest risk investment you can find (Money markets or CDs). If you don't mind losing money this year if you will likely make it back next year, then you can look at riskier investments (Stock index fund). A short time frame (is grad school in your five-year plan?) will neccessitate a safer investment as well since you won't have the time to %26quot;earn back%26quot; any short term losses. A longer time frame allows for a riskier investment, since you will have the time to recover those short term losses.

Hope this helps.

Savings vs Paying Off Student Loans?

I believe that what you have been doing is good. You definitely want to pay off that high interest loan ASAP. However, I would put your $7K into a 6mo. CD to earn a little higher interest which would help to counteract the high interest loan rate.

Good luck with your grad school plans.

Savings vs Paying Off Student Loans?

The first thing you should do is to find out if you could refi your loans to a lower rate. If you can't, just try to pay 10% monthly on your loans so after 10 months, you should only have a month left on your loans, Then just think you still owe the money and put it in a cd or a money market account. I'm 63 now, but my wife and I have put away money from our pay for the past 35 years.